BEIJING — Following Washington’s decision to ban Huawei and some 70 affiliates over national security concerns, China has been looking for a high-tech counterpunch to use in response.
Some believe that as tensions between the world’s two biggest economies rise, Beijing is considering playing what state media have called “the ace up its sleeves,” and cutting rare earth exports to the United States.
China is the world’s biggest supplier of the minerals that are necessary for a range of tech products from smartphones to computers and the batteries in hybrid cars
U.S. Commerce Secretary Wilbur Ross has said the United States “will take unprecedented steps” to ensure the country does not end up cut off from the vital resource. The Commerce Department released a report Tuesday based on a 2017 executive order by President Donald Trump aimed at reducing the country’s vulnerabilities to a reliance on imports of the minerals such as uranium, titanium and rare earth elements.
Much like Washington’s ban cut Huawei off from key components, a move by China to cut rare earth exports could hit American tech firms hard.
But how quickly Beijing is looking to move and how effective a ban might be is less than certain.
Prudent approach
Liao Qun, chief economist at China’s state-owned CITIC Bank International says it is clear from what has been said about rare earths that it is a weapon that Beijing could use. He says that it is not likely that Beijing will reach for it soon, but the situation could quickly escalate if President Donald Trump slaps tariffs on all remaining Chinese goods exported to the United States.
“It all depends on what steps the U.S. takes next and whether it escalates tensions by slapping tariffs on US$300 billion-worth [of Chinese exports]. If the U.S. keeps on escalating the trade war, China will continue its tit-for-tat retaliation,” Liao said.
The signals that a ban on rare earths could be coming have been building since China’s leader Xi Jinping visited a mine last month. Last week, a strongly worded opinion piece in the People’s Daily told Washington to not underestimate China’s ability to strike back to defend its rights to safeguard its development. Adding: “Don’t say we didn’t warn you.”
That phrase caught the attention of many analysts, with some arguing that China’s use of a rare earths ban could lead to full blown trade war, if not a new cold war.
The People’s Daily has used that tough phrase ahead of the China-Vietnam War in 1979 and China’s border war with India in 1962.
The paper also said: “Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery.”
Expert meetings
On Tuesday, the steady drum beat of warnings continued as China’s state media reported on a meeting of rare earth experts to discuss measures to strengthen controls on exports of the “strategic resource.”
The meeting was hosted by China’s state planning body, the National Development and Reform Commission and experts urged Beijing to create a system to track and review the export of rare earths, to clamp down on illegal production and smuggling of the minerals to protect the environment.
In a statement, the NDRC said: “China should accelerate green and intelligent transformation of the rare earth sector, fully utilize its value and effectively promote the high-quality development of the resource.”
Despite concerns about the impact a ban could have and how it might heighten trade tensions even more, analysts note that much like tariffs a ban on the export of rare earths could cut both ways.
For example, rare earths are used in products that China needs and cannot make on its own such as semiconductors. Banning the export of rare earths could end up making it harder for China to get its hands on the high-tech goods it needs, analysts note.
And while China is the world’s biggest supplier of rare earths, it is not the only one. Australia is the largest miner after China and has the world’s sixth largest reserves, according to data from the US Geological Survey.
Brazil and Vietnam both have reserves that are about half of China’s 44 million tons. The United States has reserves of 1.4 million tons, according to USGS.
Evaluating impact
The impact that any ban can have is really limited, argues Liu Meng-chun, director of the Chung-Hua Institution of Economic Research’s mainland China division in Taiwan.
Liu notes that unlike energy boycotts, a ban on rare earths is unlikely to drive up prices of products immediately or trigger a public outcry.
“The use of rare earths is limited, and so every country has its own safe level of reserves, in particular, for military use,” he says. “For many technical applications, Japan, in particular, has found many ways to replace rare earths. So, there are many technological ways to overcome” a shortage, Liu says, if there is one.
In 2010, when tensions rose between Beijing and Tokyo over a territorial dispute, China cut the export of rare earths to Japan. The ban, however, had little impact on Tokyo, analysts note, as Japan found ways to adapt.
In response to Beijing’s halting of exports of rare earths to Japan in 2010 — then the world’s largest importer — the US, European Union, Japan and other nations filed a case against China’s quotas and won. The WTO ruled that China cannot put limits on rare earth exports.
At the time, China said it had to curtail exports in order to protect the environment and preserve resources. Similar arguments that were floated this week when the NDRC met with experts.